Thursday's ruling is a setback for prime minister Manmohan Singh's government, which oversaw the sale of the licenses at below-market prices, costing the exchequer up to $36bn in lost revenues.

The licences affected by Thursday's decision include those held by Unitech Wireless, the Indian joint venture of Norway's Telenor and Unitech.

"We have been unfairly treated as we simply followed the government process we were asked to," the Telenor joint venture said in a statement.

"We are shocked to see that Uninor is being penalised for faults the court has found in the government process."

The telecoms scandal is the biggest of several to emerge during Singh's second term and triggered massive street protests last year.

Two ministers, including former telecoms minister Andimuthu Raja, who presided over the 2008 grant process, have resigned. Raja is in prison awaiting trial.

"This country is no longer willing to allow these corrupt corporations and these corrupt public officials to retain the benefits of their illegal and corrupt actions," said Prashant Bhushan, a lawyer and petitioner in the case.

India is the second-largest mobile phone market in the world by subscribers, with 894 million at the end of December, although the market is crowded with more than a dozen operators, making call rates among the lowest in the world.

Companies benefit

Investors and operators have long been calling for consolidation in the crowded industry, and Thursday's ruling stands to benefit the country's biggest operators, including Bharti Airtel and Vodafone.

"Players like Bharti Airtel and Idea Cellular with popular brands and strong balance sheets will be clear beneficiaries because they can take advantage of this situation and increase market share," said Jagannadham Thunuguntla, the head of research for SMC Investments and Advisors, Mumbai.

Stocks in telecoms companies including Reliance Communications and Unitech fell after the verdict, but shares in Bharti Airtel jumped.

"For foreign investors, it is a very bad news. What mistake did they do? They partnered with Indian companies, invested lots of money and followed the process of that time," said Rishi Sahai, director at consultancy firm Cogence Advisors in New Delhi.

The supreme court said the current licenses would remain in place for four months, in which time the government should decide fresh norms for issuing licenses, a lawyer involved in the case said.